Britain’s new Chancellor of the Exchequer, Philip Hammond, waits to greet U.S. Treasury Secretary Jack Lew, at number 11 Downing Street in London last week. Picture: REUTERS/NEIL HALL
Britain’s new Chancellor of the Exchequer, Philip Hammond, waits to greet U.S. Treasury Secretary Jack Lew, at number 11 Downing Street in London last week. Picture: REUTERS/NEIL HALL

PARIS — Britain is set for a major hit next year from its momentous decision to leave the European Union, the Organisation for Economic Co-operation and Development said on Wednesday, halving its growth forecasts for the world’s fifth-biggest economy.

In publishing its revised forecasts, the OECD said the British economic growth was likely to be "well below the pace in recent years and forecasts prior to the referendum". It predicted growth of 1% in 2017 after projecting in June, before Britain’s EU referendum, growth of 2%.

"Uncertainty about the future path of policy and the reaction of the economy remains very high and risks remain to the downside."

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UK Chancellor of the Exchequer Philip Hammond said "underlying strength in the UK economy will support growth this year". While he acknowledged "there may be some difficult times ahead", Hammond said the government had the tools to support the economy as Britain adjusted to its new relationship with the EU.

The OECD warned that a weaker outlook for Britain, the second-biggest economy in the European Union, would also push down global output, which was stuck in a "low-growth trap".

Global growth is seen at 2.9% this year, rising to 3.2% in 2017, the OECD said, trimming both forecasts by 0.1 percentage points.

The effects of Brexit were offset by a "gradual improvement in major emerging market commodity producers", said the OECD.

However, while the Brexit impact on the rest of the euro area has been "modest" so far, the OECD said the spillover would result in "more negative effects" next year.

"The Brexit fallout in terms of growth will hit the euro area through the trading relationships being uncertain and through exchange rate effects," said the OECD chief economist Catherine Mann. The pound had depreciated about 10% since the June 23 referendum, making EU goods more expensive for consumers in Britain.

The organisation downgraded its 2017 forecast for the 19-nation eurozone by 0.3 percentage points, projecting growth of 1.4% after 1.5% this year.

The key to avoiding significant economic problems will to sort out Britain’s trading relationships with its partners quickly, the OECD said.

Britain’s government has not formally demanded talks on leaving the EU, but it is expected to do so early next year. It will then have two years to negotiate its new relationship with the bloc, as well as strike trade deals with other nations.

Mann said the OECD did not see a return to faster global growth unless governments raised spending as businesses are reluctant to invest in a slow-growth environment. "But if there is a collective fiscal expansion, that would be the signal to promote growth, catalyse business investments … and we get out of the low-growth trap," she said.

AFP